On August 7, 2013, the first Jiangsu Entrepreneurship Competition and the second China Innovation and Entrepreneurship Competition (semi-final) was held in Suzhou Industrial Park. Below is a summary of Kuang Yi's, Vice President of Investment at Legend Star Venture Capital Co., Ltd., speech at the competition site on "The Key Factors VC Investments Focus On."
Many people now say that finding an investor is like dating, which is actually quite true. I hope today's sharing will give you some insights into how an investor's experience can help you understand investors better, and also learn how to find your other half.
In fact, every time you stand on stage, many people are watching you, and it's a particularly nerve-wracking process inside. Investors and entrepreneurs may seem like investors are often judges reviewing things on the surface, but after being in this industry for a long time, I feel that investors might be just like entrepreneurs. When we first meet, we're like a poor couple, hoping to walk together for life. The process of raising funds itself is similar to dating, and eventually marrying someone who becomes your other half.
I want to talk about two points today: one is what kind of mindset we should have when raising funds. This part mainly focuses on how our group of investors perceives and thinks about issues—understanding your other half, or the people you might collaborate with in the future, and what they're really thinking. The second point involves some technical aspects of fundraising.
The Basic Characteristics of Investment Institutions
Risk capital investments are generally made in early-stage companies, and risk capital only holds a small percentage of shares, as everyone knows. Decisions are based on professional investment. If you're dealing with individual investors or relatives and friends, such as parents, siblings, etc., their decision-making processes are usually faster and more convenient. You often hear in the media about someone doing something, and the next day someone receives a certain amount of money. This is more related to media hype. Professional investment institutions go through a relatively long procedural process.
Another point frequently discussed is the value an investor brings to a company after entering. While this does exist, investors are more like advisors and assistants in decision-making. We primarily provide added value services, such as support in specialized areas like finance and human resources. Ultimately, the real action still comes from the entrepreneurial team.
The last point is that venture capital primarily generates returns through IPOs and transfers. What exactly are these venture capitalists thinking about, or what goes through the minds of the investment managers or partners sitting across from you when you negotiate with an investment institution?
In essence, the question boils down to: How much value can this company grow after my investment relative to its valuation? Despite all the flowery language we use, the core revolves around these realities.
All Investment Institutions Have Capital Nature: There’s No Free Lunch
Lenovo Star's training is philanthropic; that's a different matter. But please remember, there's no free lunch. If you need unconditional funding, such as government grants or family support, it's best to seek those rather than institutional investors. They expect high growth in the value of the companies they invest in. Every investor you interact with carries this ambition—if they invest in a company and something terrible happens, it could significantly impact their reputation and future career development.
Investors Are Very Busy
This is a typical process for obtaining funds from an investment institution. If you hope to secure investment in the future, you'll likely go through a similar process, starting from preparing some PPTs and recommendation materials, then discussing with investment managers, and finally reaching the partner level. The entire process is very long. Here's a set of real data: In the past 12 months, Lenovo Star has reviewed over 1500 business plans, conducted face-to-face meetings with at least 300 teams, entered our preliminary screening process with over 100 projects, passed the initial screening with about 20, and finally approved only 10 projects. Investors are busy, so it's important to cherish their time.
On one hand, we review a large number of projects, so if you can't impress investors within a short period, the chances of moving forward decrease. Additionally, from the initial contact to signing the entire investment contract, it takes roughly six months because the transaction structure went through a tough negotiation process, along with the statistics for the invested project. The fastest project we've had took one and a half months from contact to decision, with an average time of about three months. Truly speaking, a startup's time is also very precious. During this process, I believe all projects undergoing financing encounter similar issues: investors will work closely with the entrepreneurial team, making it difficult for the team to focus on their own business. Improving the efficiency of the financing process not only helps investors better evaluate but also saves the entrepreneur's time, as both sides' time is extremely valuable.
Fundraising Is a Process of Equivalent Exchange
Raising funds for a startup company actually comes at a high cost. It's not hard to reach out to investors, and it won't take too much time. However, once you start seriously interacting with investment institutions, it becomes very time-consuming for the entrepreneur. A startup's most valuable resource is the time and energy of its core team. Entrepreneurs and employees of investment companies often witness various disputes, like the conflicts between CDH Investments and Qiao江南, which resemble old grudges in the江湖world.
Entrepreneurs and investment institutions genuinely need each other. Both parties bring irreplaceable elements to the table, forming the foundation of their cooperation. Beyond spiritual pursuits, interests play a significant role in business. While entrepreneurs hope that the entry of investment funds will lead to rapid company growth, differences in value perception must be acknowledged. For instance, I might hope my company is valued at 1 billion yuan with numerous future benefits, but if you tell me it's only worth 10 million, I might want to hit you with a brick. Conversely, an institution might encounter entrepreneurs telling them their company is worth 300 million, offering a price of 1 billion, yet expecting them to negotiate. If they quote 300 million, I wouldn’t even know where to start negotiating.
Mutual trust is crucial. Has anyone here experienced betrayal by a boyfriend or girlfriend or something similar? Once either an investor or an entrepreneur experiences a serious issue, the collaboration loses its foundation. Lastly, after marriage, there will be mutual tolerance. Unfortunately, you still have to endure for 5-8 years. Starting a new company typically takes 8-10 years to succeed, during which you'll constantly scrutinize whether you like or dislike the company. Therefore, I strongly advise everyone to pay attention when choosing an investment institution or handling financing matters.
Some people say fate is predetermined, and fundraising is somewhat similar. Entrepreneurs should approach it calmly. When an entrepreneur decides to raise funds, the amount they can obtain and the valuation are almost equal. These factors depend on the entrepreneur's experience, which cannot be changed, and the company's business status, such as expected changes within 3-5 months or up to 12 months. Most importantly, the current state of the capital market—whether it's as hot as before—basically determines the company's future valuation and whether it can secure funding. Maintaining a peaceful mindset is essential, as this situation isn't something we as individuals can influence or change.
What Investors Care About Most
Next, let's discuss the technical aspects of fundraising. Long ago, when I was busy with work, my parents forced me to go on blind dates. Initially, I chose fancy restaurants, but later realized that if the date didn't want to talk much, they'd still finish the meal. I started with hotpot, which lasted longer, then switched to Chinese cuisine, and eventually simplified meals. If I couldn't bear it anymore, I'd just find a place to drink tea. The fundraising process is similar. Among all techniques or numerical levels, the most important thing is: how can entrepreneurs efficiently convey their core value to investors in the shortest possible time while thoroughly understanding the investor? Time is truly precious for everyone.
During my blind dates, I encountered many questions, like how much per square meter do parking spaces cost in your neighborhood, or classic questions about physical appearance and body shape. There's nothing wrong with that. Just like getting married, investing and being invested involves exchanging something valuable. Thus, detailed mutual investigations are normal. I believe it's rare for a woman to get married without understanding her partner's income status. Similarly, investment institutions care deeply about a company's profitability and growth potential, which they’ll ask in various forms. When answering these questions, consider carefully what they're truly examining or concerned about.
A crucial question is: if you were to do something in the internet sector, how would you handle it? Place yourself in the position of the company being invested in. If I gave you several million, how would you compete with Tencent? Or if I gave you 3 billion, how would you play against them? In such scenarios, investors aren't necessarily interested in your specific answers but rather in how you think when faced with challenging or awkward situations. So, effectively answering questions is key. If a woman asks how much parking spaces cost per square meter in your neighborhood, she's not necessarily asking about renting but rather probing whether you own a car or a house. If it fits, great; if not, move on to the next option.
I always step back to observe the entrepreneurial team because what they've done in the past directly impacts what they can achieve in the future. This largely determines the initial evaluation investors have of the team. For example, if you sell flour, selling oil might be acceptable, but if you sell lime, though the products look similar, the markets are entirely different, leading to doubts about the team's adaptability in a new environment.
Lastly, here's a small tip for entrepreneurial teams: what attitude leaves a good impression? When my basic conditions are already determined, how can I communicate effectively to increase the success probability?
One is to be honest. Many things cannot be hidden anyway. Investors will try every means to investigate your family background for three generations. So, if there are any issues, there's no need to hide them, as investors will eventually uncover them.
Objectively and accurately describe things. The future prospects may be uncertain, but some aspects can add value. For example, when describing a scenario, explain what kind of application it is. If my downstream market is automobiles, it's a billion-dollar market, and the investor knows that. However, how much of that billion belongs to you must be clear. Also, calculate how the project will perform in the automobile market. We've seen some seasoned or already funded entrepreneurs directly outline their target markets, detailing how they calculated them. After doing so, they leave a favorable impression, akin to politely pulling out a chair for someone during a first dinner meeting—it's always polite.
Some things can lead to immediate rejection, the most important being dishonesty or intentional misleading. The individuals from an investment institution who interact with you, like investment managers or VPs, stake their professional reputations when they want to invest in a project. If continuous problems arise with a project, their future career development becomes challenging. If an entrepreneur deceives an investor, it will definitely cause trouble. I don't need to use the relationship between marriage and love as an example. The remaining points involve excessive confidence or excessive humility. If you know some economic theories, you'll understand that supply and demand determine everything. In a science school where the female-to-male ratio is 20:1, like my alma mater Jiaotong University, ladies are naturally more popular. Conversely, in an art school or nursing school, gentlemen are more favored.
The Negotiation Between Investors and Entrepreneurs
It's normal for investors and entrepreneurs to engage in negotiations regarding fine details of price terms. It's important to first judge the situation to a degree that both parties can accept relatively easily. Regarding how big the company will grow in the future, avoid making it sound overly certain at the beginning. Let investors understand the difficulties and pain points thoroughly, which makes them feel you're knowledgeable about the industry and leaves a good impression. Don't be overly humble either.
Asking for advice is fine, especially in areas you're most skilled at. If you're a technical expert, delve deep into the technical aspects. Some projects involve industries they're unfamiliar with, and they might say, "I don't understand this field; could you introduce it?" That's fine. Provide a list, including all the presidents of relevant industry associations, and we'll immediately rate it higher. Trust and goodwill accumulate step by step, so don't miss any opportunity to increase your value in the other party's eyes, but avoid committing fatal mistakes.
Kuang Yi, Vice President of Investment at Legend Star, delivering a live speech at the event.